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Social Security was originally designed to be a supplemental form of retirement income. Under the three-legged stool model, retirees ideally live on a combination of employer pensions (or more likely 401(k)s and IRAs), personal savings and Social Security. But many retirees struggle to make ends meet, with some relying solely on Social Security.
Whatever your situation, there are ways to offset income when Social Security and other sources fall short. Here are some of the most common choices.
No. 1: Continue to Work
Retirement by definition means stopping work. But many senior citizens — whether by choice or necessity — continue to work for income past retirement age. Many take part-time jobs while others put in 40 hours per week. For some, side hustles that they enjoyed while working full time continue. Others find consulting gigs related to their careers.
It’s important to remember that receiving income impacts your Social Security benefits. If you are under full retirement age, the Social Security Administration (SSA) deducts $1 from your benefit payments for every $2 you earn above the annual limit, which is currently $24,480. That low threshold encourages many to delay receiving benefits.
In the year you reach full retirement age (FRA), SSA deducts $1 for every $3 you earn above $65,160. Once you reach full retirement age (67 for most people), you can earn as much as you want without penalty.
No. 2: Delay Full Retirement
This tactic obviously relates to No. 1. If you foresee an income shortfall, it can be smart to continue working to full retirement age. If you start collecting S.S. benefits before you reach FRA, you’ll receive less money each month.
How much less? It depends on your lifetime earnings history and at what age you start Social Security before FRA. If you retire at age 62 (the earliest age at which you can apply), the maximum amount you could receive is $2,969. If you retire at FRA, your maximum benefit could be $4,152. And if you retire at age 70, that maximum payment hits $5,181.
It’s a timing game: When is the best time to start collecting benefits based on your personal financial and health situation? Some retirees consult with professional financial advisers to make these decisions.
No. 3: Seek Income-Producing Investments
Ask any older investor about their portfolio, and they’re likely to mention dividends, which are regular payments from a company’s profits. This is a way to receive income, often quarterly but sometimes monthly, in addition to the appreciation of an investment.
You can buy individual stocks that offer dividends, such as The Coca-Cola Co. (KO), General Dynamics (GD), or AT&T Inc. (T). Or you can buy diversified buckets of stocks that pay dividends, in the form of mutual funds or exchange-traded funds (ETFs). A few examples: Schwab U.S. Dividend Equity ETF (SCHD), Vanguard High Dividend Yield ETF (VYM), and iShares Core Dividend Growth ETF (DGRO).
No. 4: Cut Costs
This is a no-brainer and something many people do or plan to do in retirement. A lot of these monthly expense cuts come naturally. Often, mortgages are paid off and/or the decision is made to downsize your home. Commuting and other work-related costs go away. Children, ideally, are self-supporting adults.
The stereotype of retirees moving to sunnier locales holds some truth. Not only do you get better weather, you often also find a lower cost of living and lower taxes. And if you prefer cooler climates, there are plenty of places that are cheaper than the expensive urban areas where many of us live.
No. 5: Consider an Annuity
These aren’t the best investment tools for all retirees, but some like the guaranteed income they offer and the insurance benefit. If you’re considering an annuity, do your due diligence. Many have high fees and hidden costs.